Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB
S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals
in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance
of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No. 84197) was dismissed but in all other
respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim

requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the
rate of 12% per annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966, until full payment is
made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further required to pay cross party
plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half,
the amount of Pl84,878.74 with interest from the filing of the cross-
Page 1 of 12
 complaints until the amount is fully paid; plus moral and exemplary damages
in the amount of P184,878.84 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary damages
in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's
fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer

against defendants Bormaheco, the Cervanteses and Constancio B. Maglana,
is dismissed. Instead, plaintiff is required to indemnify the defendants
Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees
and the amount of P4,379.21, per year from 1966 with legal rate of interest up
to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the

amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action

was filed in good faith. The fact that the properties of the Bormaheco and the
Cervanteses were attached and that they were required to file a counterbond
in order to dissolve the attachment, is not an act of bad faith. When a man
tries to protect his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-

party defendant, for it only secured the attachment prayed for by the plaintiff
Pioneer. If an insurance company would be liable for damages in performing
an act which is clearly within its power and which is the reason for its being,
then nobody would engage in the insurance business. No further claim or
counter-claim for or against anybody is declared by this Court. (Rollo - G.R.
No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business
as owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type
aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July
18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R.
No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of
JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

Page 2 of 12
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in
both petitions) contributed some funds used in the purchase of the above aircrafts and
spare parts. The funds were supposed to be their contributions to a new corporation
proposed by Lim to expand his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the
other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity
agreements stipulated that the indemnitors principally agree and bind themselves jointly
and severally to indemnify and hold and save harmless Pioneer from and against any/all
damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety upon the
bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all
sums and amounts of money which it or its representatives should or may pay or cause to
be paid or become liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor
of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the
former. It was stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of
Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the
Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request

payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco
and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim
alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs
complaint against all the defendants was dismissed. In all other respects the trial court's
decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
Page 3 of 12
 THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND
THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE
AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS
DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer

had reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount of
P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not
the real party in interest to institute the instant action as it does not stand to be
benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the

amount from defendants, hence, it instituted the action is utterly devoid of
merit. Plaintiff did not even present any evidence that it is the attorney-in-fact
of the reinsurance company, authorized to institute an action for and in behalf
of the latter. To qualify a person to be a real party in interest in whose name
an action must be prosecuted, he must appear to be the present real owner of
the right sought to be enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155). It has been held that the real party in interest is the
party who would be benefited or injured by the judgment or the party entitled
to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125,
131). By real party in interest is meant a present substantial interest as
distinguished from a mere expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield
Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d
424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as

the real party in interest as it has already been paid by the reinsurer the sum of
P295,000.00 the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff

Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total amount of
P37,050.00 from the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is
patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment
as it has already been paid by the reinsurance company of the amount plaintiff
has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability
to JDA. Well settled is the rule that no person should unjustly enrich himself
at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-
25).
Page 4 of 12
The petitioner contends that-(1) it is at a loss where respondent court based its finding that
petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been
raised by any of the parties herein both in their answers in the court below and in their
respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically
that it was paid by its reinsurer, still none of the respondents had any interest in the matter
since the reinsurance is strictly between the petitioner and the re-insurer pursuant to
section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner
is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of
unjust enrichment is not applicable considering that whatever amount he would recover
from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was
never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed
out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of

its obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still
any claim against defendants, considering the amount it has realized from the
sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of
G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it
had executed in favor of JDA, collected the proceeds of such reinsurance in
the sum of P295,000, and paid with the said amount the bulk of its alleged
liability to JDA under the said surety bond, it is plain that on this score it no
longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is

suing defendants for the amount paid to it by the reinsurers, notwithstanding
that the cause of action pertains to the latter, Pioneer says: The reinsurers
opted instead that the Pioneer Insurance & Surety Corporation shall pursue
alone the case.. . . . Pioneer Insurance & Surety Corporation is representing
the reinsurers to recover the amount.' In other words, insofar as the amount
paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-
fact.

But in the first place, there is not the slightest indication in the complaint that
Pioneer is suing as attorney-in- fact of the reinsurers for any amount. Lastly,
and most important of all, Pioneer has no right to institute and maintain in its
own name an action for the benefit of the reinsurers. It is well-settled that an
action brought by an attorney-in-fact in his own name instead of that of the
principal will not prosper, and this is so even where the name of the principal
is disclosed in the complaint.

Page 5 of 12
 Section 2 of Rule 3 of the Old Rules of Court provides that
'Every action must be prosecuted in the name of the real party in
interest.' This provision is mandatory. The real party in interest is
the party who would be benefitted or injured by the judgment or
is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is

not a real party in interest, that there is no law permitting an
action to be brought by an attorney-in-fact. Arroyo v. Granada
and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and
Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it
paid to JDA is the difference between the two amounts, or P3,666.28. This is
the amount for which Pioneer may sue defendants, assuming that the
indemnity agreement is still valid and effective. But since the amount realized
from the sale of the mortgaged chattels are P35,000.00 for one of the
airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer
is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against
defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect of
payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument that
the respondents had no interest in the reinsurance contract as this is strictly between the
petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section
98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by

subrogation as are acquired in similar cases where the original insurer pays a
loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general

applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v.
Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the insurance company
does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

Page 6 of 12
 Note that if a property is insured and the owner receives the indemnity from
the insurer, it is provided in said article that the insurer is deemed subrogated
to the rights of the insured against the wrongdoer and if the amount paid by
the insurer does not fully cover the loss, then the aggrieved party is the one
entitled to recover the deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of the indemnity paid is the
insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact
of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was not
the real party in interest in the complaint and, therefore, has no cause of action against the
respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that it is
entitled to recover from the counter indemnitors. It does not, however, cite any grounds
except its allegation that respondent "Maglanas defense and evidence are certainly
incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The
trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be

valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in
Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to Pioneer
Insurance to cover the bond, and this indemnity agreement would be
cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties

have impaired and rendered insufficient the security under the
chattel mortgage and there is thus no other sufficient security for
the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no
other security for the claim sought to be enforced by this action, which
necessarily means that the indemnity agreement had ceased to have any force
and effect at the time this action was instituted. Sec 2, Rule 129, Revised
Rules of Court.

Page 7 of 12
Prescinding from the foregoing, Pioneer, having foreclosed the chattel
mortgage on the planes and spare parts, no longer has any further action
against the defendants as indemnitors to recover any unpaid balance of the
price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors, would
be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.

Independently of the preceding proposition Pioneer's election of the remedy

of foreclosure precludes any further action to recover any unpaid balance of
the price.

SAL or Lim, having failed to pay the second to the eight and last installments
to JDA and Pioneer as surety having made of the payments to JDA, the
alternative remedies open to Pioneer were as provided in Article 1484 of the
New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by

extrajudicial foreclosure and the instant suit. Such being the case, as provided
by the aforementioned provisions, Pioneer shall have no further action against
the purchaser to recover any unpaid balance and any agreement to the
contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L-
24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer
is actually exercising the rights of JDA as vendor, having subrogated it in
such rights. Nor may the application of the provision be validly opposed on
the ground that these defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L-
27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

The principal hereof shall be paid in eight equal successive three

months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due
and payable on the 26th day x x x of each succeeding three
months and the last of which shall be due and payable 26th May
1967.

However, at the trial of this case, Pioneer produced a memorandum executed

by SAL or Lim and JDA, modifying the maturity dates of the obligations, as
follows:

The principal hereof shall be paid in eight equal successive three

month interval installments the first of which shall be due and
Page 8 of 12
 payable 4 September 1965, the remainder of which ... shall be
due and payable on the 4th day ... of each succeeding months and
the last of which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding
three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates,

effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant Maglana
knew of and consented to the modification of the obligations. But if that were
so, there would have been the corresponding documents in the form of a
written notice to as well as written conformity of these defendants, and there
are no such document. The consequence of this was the extinguishment of the
obligations and of the surety bond secured by the indemnity agreement which
was thereby also extinguished. Applicable by analogy are the rulings of the
Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553,
563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the guaranty
The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension time referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson
& Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid
the same. Consequently, Pioneer has no more cause of action to recover from
these defendants, as supposed indemnitors, what it has paid to JDA. By virtue
of an express stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on every
installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these

defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made after
the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from
Pioneer and its surety by reason of the filing of the instant case against them
and the attachment and garnishment of their properties. The instant action is
clearly unfounded insofar as plaintiff drags these defendants and defendant
Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

Page 9 of 12
We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose

agreement was to do business through the corporate vehicle but who failed to
incorporate the entity in which they had chosen to invest? How are the losses
to be treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form? This Petition
presents these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to
incorporate, a de facto partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in proportion to
their contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the petitioner as
their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants'

cross-claims in the total amount of P184,878.74 as correctly found by the trial
court, with interest from the filing of the cross-complaints until the amount is
fully paid. Defendant Lim should pay one-half of the said amount to
Bormaheco and the Cervanteses and the other one-half to defendant Maglana.
It is established in the records that defendant Lim had duly received the
amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes
and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed by
the supposed charter and the laws of the state relating thereto and not by the
rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md.
446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail,
to form a corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29
Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves
together under articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a corporation within
the statute, they become in legal effect partners inter se, and their rights as
members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555;
Whipple v. Parker, 29 Mich. 369). So, where certain persons associated
themselves as a corporation for the development of land for irrigation
Page 10 of 12
 purposes, and each conveyed land to the corporation, and two of them
contracted to pay a third the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the corporation, it was
treated as a trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership assets, sold, and
the proceeds distributed among them in proportion to the value of the
property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such
a relation does not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves, when their purpose is
that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only
when necessary to do justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers who engage in
business under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation
between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted by the latter
(Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol.
68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found through Exhibit 58, that
the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and
spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob
Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the cross-
claims of the respondents to the effect that they were induced and lured by the petitioner to
make contributions to a proposed corporation which was never formed because the
petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes
and Maglana to expand his airline business. Lim was to procure two DC-3's
from Japan and secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery
to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate his
airline in accordance with their agreement and proceeded to acquire the
planes on his own account. Since then up to the filing of this answer, Lim has
refused, failed and still refuses to set up the corporation or return the money
of Maglana. (Record on Appeal, pp. 337-338).

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while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim,
cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which the
latter considered as their lawful contribution and participation in the proposed
corporation to be known as SAL. Arrangements and negotiations were
undertaken by defendant Lim. Down payments were advanced by defendants
Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of
this trickery and misrepresentation of the other, Jacob Lim, when the herein
plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby
forcing them to file an adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by defendants Bormaheco and
Cervanteses, to defendant Lim, to surrender the possession of the two planes
and their accessories and or return the amount advanced by the former
amounting to an aggregate sum of P 178,997.14 as evidenced by a statement
of accounts, the latter ignored, omitted and refused to comply with them.
(Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner to
a reimbursement of the supposed losses of the proposed corporation. The record shows
that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

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